TURKEY: Foreign Flows Into TRY Bonds Could Be Supported Further (2/2)

Amid growing expectations of a July rate cut, Ekonomi ran a piece this morning in which they noted that the recent increase in the withholding tax on TRY deposits has tempered expectations that the CBRT will being its easing cycle with a large cut, as a tax reduction had been expected to accompany any rate cuts in order to prevent a rush to foreign currency. 

• The primary goal of the withholding tax tweak is likely to bolster public finances as the government faces a widening budget deficit, but the move complicates the central bank’s efforts to de-dollarise the economy and encourage lira savings as it deteriorates real returns on TRY-denominated assets.
• One source told the newspaper that the tax increase may have been aimed at increasing interest in government bonds, which are subject to zero withholding tax, and this may continue to boost foreign investor flows into lira bonds moving forward.
• Looking ahead, data tomorrow is expected to show a sharp contraction in the current account deficit in May, from a deficit of $7.86bln in April to a deficit of $0.90bln, with seasonally higher tourism revenues expected to contribute to the improvement. However, Ekonomi reported last week that summer tourism has fallen short of industry expectations, with occupancy rates down 5% in May and tourist arrivals down 1.8%.